Greece debt restructure – where do we stand?

7th March 2012

Yesterday was a day where we saw substantial equity market falls for the first time in a while and the first time in 2012 so far. The US Dow Jones Industrial Average fell by 203 points for example and the link with today's theme is that at least some of the fall was blamed on the situation in Greece. It also allows me to point out the recovery in equity markets which has taken place in recent times. In spite of yesterday's fall 2011 ended with the Dow Jones Industrial Average at 12217 so it is still up considerably and in fact until yesterday we were at levels not seen since early 2008.

Since then we have had some news on the economics front which is that Australia's economic growth in the fourth quarter of 2011 was only 0.4% which was half the rate of the previous quarter. So her quarterly economic growth as measured by Gross Domestic Product figures has gone 1.4%, 0.8% and now 0.4% giving us a trend which is clear and sadly rather familiar. Indeed half of the growth was caused by an increase in government spending adding further gloom to the numbers.

In many ways her enormous commodity resources have allowed Australia to have a relatively smooth ride through the credit crunch era but two problems may be coming home to roost. Firstly an over-valued exchange-rate which is a consequence of the resources strength and a house market boom which has ended and may yet turn to bust.

Greece and her debt restructuring

Where do we stand?

The offer is as follows from the Greek Ministry of Finance

"an invitation to private sector holders of certain Greek bonds to exchange their holdings of existing Greek bonds for new bonds to be issued by the Hellenic Republic having a face amount equal to 31.5% of the face amount of the debt exchanged and notes of the European Financial Stability Facility maturing within 24 months having a face amount equal to 15% of the face amount of the debt exchanged, each to be delivered by the Hellenic Republic at settlement. Each participating holder will also receive detachable GDP-linked securities of the Hellenic Republic with a notional amount equal to the face amount of the new bonds of the Hellenic Republic issued to that participating holder."

So there you have it 46.5% of your money back in total with an additional option or hope that you might also benefit from the GDP-linked securities. However eyes will also have turned to this bit.

"the (Hellenic) Republic has positive GDP growth in real terms in excess of specified targets."

Positive GDP growth looks a long way away right now although over the period such a deal is intended to last much may (and hopefully will…) change.

For those wondering why net present value losses are estimated at 70% or so as opposed to the 53.5% implied above this is because future interest-payments are lower too.

"2.0% per annum to payment date in 2015

3.0% per annum to payment date in 2021

4.3% per annum thereafter"

Comment

We immediately see that the deal is not as clear cut as many would have you believe. For example the mathematics of the deal is calculated on the basis that Greece can raise the coupon payments to 3% in 2015 (and 4.3% in 2021). What if she continues on her downward trajectory and cannot? In addition the GDP-linked securities are complicated and raise their own uncertainty.

Also the coupon on the new bonds will bear no relation at all to the likely yield on the new bonds which says it all in many ways. Even 4.3% is nowhere near the possible 19/20% yield on new Greek bonds (h/t Pawelmorski).

I am reminded that the same group of people who turned down a 21% debt reduction last autumn are supposed to accept a much higher reduction now! Mind you by its latest output Greece's government may be thinking the same.

"The Republic's representative noted that Greece's economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI (Private Sector Involvement)."

They decided to lob in a threat as well, although some may consider it a long-hoped for promise!

"if PSI is not successfully completed, the official sector will not finance Greece's economic programme and Greece will need to restructure its debt (including guaranteed bonds governed by Greek law) on different terms."

“It would have been worse otherwise – believe me – you are better off if you trust me”. Unbelievable.

They are just the high priests – the real problem is the religion. Our economic system has failed – the debt fuelled fake growth was always going to reach its denouement. They can’t fix that even if they wanted to.

We can default on the debt or we can inflate it away but either way we will be a lot poorer. Maybe we can recover after the debt burden has been lifted but I think it will be extremely difficult now we have dismantled & sold off the real engine of growth – our industry. In any case it will take decades.

I would prefer default but its obvious the politicians and the wealthy don’t. They stand to make even more from inflation as Mervyn kindly points out.

Given the sheer immensity of the debts then we are going to need a heck of a lot of inflation – interesting times……

Priests is right… to base the report on so much conjecture just reveals how the whole lot have deified themselves. It’s like an organisation and industry that for the last 100 years, has always been so unabashedly secular* has been sipping from the font, and now relies on dogma and deception, while the majority despair.

Excluding the original Quakers and of course the Goldman Sachs “Doing god’s work” bulls**t.

Yes, they want unquestioning faith – Mervyn gets very irritated if anybody puts a serious question to him, not that it happens often.

They will likely inflate because they think ultimately they have the power to control inflation. They think its a monetary effect and they control money. Default is scary for them, they feel they can’t control it – they have no way of predicting how the wildfire would spread in the global credit system. They were traumatised by the Lehmans experience and they will do anything to avoid a repeat.

Of course, they are wrong – but never mind they can rewrite history to show it would have been worse otherwise.

Hi Patrick
One of the changes that took place in the City of London was that many of the stockbroking and merchant banking firms that we had got subsumed. For example my first post university employer Phillips and Drew was bought by UBS. Then many banks merged. Then we ended up with places like Goldman Sachs becoming in certain areas rather like monopolies. Then we wonder how it went wrong!
That is before we get to the reverse takeover of officialdom where ex-Goldmanites head the ECB sit on the UK MPC et al…..

Hi Dave It is both interesting and revealing to see how many supposed solutions to our problems involve us taking on yet more debt. The catch is as you point out in the run-up to the credit crunch we had plenty of debt growth but less and less economic growth in response.

Thanks for this Shaun, your comments summarise the ridiculousness of this supposed review in proper light. What ever happened to peer review? It reminds me of an episode of The Office where the large lugubrious member of staff was being given his annual assessment. Asked to outline his personal weaknesses, he simply wrote “None”.
It’s also worth a look at what Simon Ward has today written elsewhere in Mindful Money, on the subject of the Bank, QE and it’s affect on inflation. His thoughts are absolutely as spot on as Shaun’s. Whereas Shaun is more of a heart-on-sleeve kind of commentator, Simon Ward delivers his sharp analysis with crystal clarity and a very nice line in very dry humour. His last comment on Merv’s successor, and by implication his lack of competence, raise an audible titter from me.

The “mainstream media” seems to do worse than “swallow the BoE’s analysis” – they seem to have decided to bury the story. I haven’t seen any comment yet, anyway – except here. The BBC may simply have nobody around to comment, as Flanders and Pesters seem to have been on hols recently. But I agree with you that the BoE’s analysis seems flimsy.

Hi Bertrambird and welcome to my part of the blogosphere
So far I can report that the various mentions I have seen around the media have swallowed the story/message somewhat hook line and sinker.That is a problem in the modern era where news organisations in essence repeat the official line.
We are in a much darker area if we move onto your suggestion of new organisations burying a story…..

Hi Shaun, I’ve been reading your blog for over a year and this discussion item takes the ticket. It appears that so few normal folk have any kind of critical and scientific perspective that have “lapped-up” the BofE explanatory mitigation as you say gospel. It’s obvious that the BofE wanted no less than a complete resolution of all economic problems but instead they’ve helped on “rich people” whilst turning the thumbscrew on everyone else. Their short shortsightedness is beyond derision, then to try and justify it is utter manipulation of our dumbned-down population. I must say it can only accelerate the use of ever more ridiculous and more idiotic behaviour leading to an effective reset in due course, praying for 2013……

“So long as they (the Proles) continued to work and breed, their other activities were without importance. Left to themselves, like cattle turned loose upon the plains of Argentina, they had reverted to a style of life that appeared to be natural to them, a sort of ancestral pattern…Heavy physical work, the care of home and children, petty quarrels with neighbors, films, football, beer and above all, gambling filled up the horizon of their minds. To keep them in control was not difficult.”

The great man foresaw so much (even the national lottery was in 1984) I think the only gap was how much technology has facilitated the transformation in our society that it is not even visible to most.

He was out by about 25 years but other than that spot-on (I just hope that Anthony Burgess’s 1985 which was written in response to Orwell’s book does not come to pass though).

It’s probably why the BBC didn’t put a statue up (too left wing from one of the most left wing institutions we have, yeah right) it would have served as a rallying point for the masses

@ Jason ArisNo way would the BBC want to draw attention to Orwell. The faithful might just try and find out who he was and read some of his books.
That really would upset the apple cart at the ‘Big Brother Corporation’….!

Hi Jason
I did not know the national lottery bit, so one more tick in the prescience column for George/Eric.
The statue debate is something that confirms me in my view it is best to avoid politics. If you do it is quite plain that that his achievements are many and if anything are still growing and accordingly it is a relatively simple matter.

Hi Rob and welcome to my part of the blogosphere
Thank you for the quote which has echoed down the years has it not? I have to confess it particularly reminds me of the relaxation of gambling legislation in recent years. Let us hope that this bit was incorrect.
“their other activities were without importance”

Hi JW
We are indeed and it would appear that regardless of how unsuccessful they have been they are still regarded as “experts”. There was an opinion piece in the FT this week from Kate Barker about UK monetary policy to which I commented adding my election suggestion and pointed out this.

As to the article by Kate Barker it would have have been helpful to have more detail on this part.

“The MPC’s failure to take sufficient account of the rapid rise in credit before the crisis probably exacerbated the subsequent recession. ”

This is because Kate was on the MPC from 2001 to 2010 and presumably one of those failing.
(It must have slipped her mind to point this out by using words such as we and us rather than the much more impersonal the…)

Hi Shaun
I’ve been following your excellent blog for sometime. Being a retired civil servant, the issue that always strikes me is that all the policy makers inhabit their own rarified bubble and hence their policies and their interpretation of outcomes never match the facts in the real world. It is also extremely worrying how tenuous their grasp is on even the most basic economics. Could this be linked to the fact that the subject seems not to be taught anymore in school.

Hi Moominmama and welcome to my blog
Just out of interest was that your experience when you were a civil servant?
As to my critique of our political class it is simply that if you would take the credit for success you are also responsible for mistakes and failures. Let me choose a non political issue in terms of sides such as the Nimrod reconnaisance plane as it went on for so long that both Labour and Tory govts. were involved. Yet after an enormous amount of expenditure the planes were crushed -an odd act in itself- and yet no-one was apparently responsible…

Yes it was unfortunately and once decisions are made, it becomes very difficult to change tack even in the face of mounting evidence. Policy decisions are however made/endorsed by Ministers; civil servants’ role is to implement Government policy, however misguided!

Dear Shaun,
Thank you for laying this out so clearly.
ZIRP and liqudity injections were clearly vital during the period when the interbank market broke down. The decision to continue from, say, March 2010, was actually a new policy devised by Ben Bernanke in his academic years after analysis of the US Depression and souped up in the late 1990s after an ill-tempered debate at Jackson Hole.

The new element was that the central bank must induce negative real bond rates, which it could only do if it maintained or raised inflation. I do not think that they planned inflation to rise to 5 per cent but were just determined that it must not fall. They obviously just failed to follow the feedback of higher inflation into real incomes: intellectual sloppiness by academics.

In my opinion ZIRP, more than QE, boosted UK inflation via the exchange rate. QE has clearly helped the fiscal balance directly, which is why the Treasury still loves it. But its effect on the real economy (and hence the underlying fiscal balance) has been negative.

That is partly because (along with tighter capital rules), QE encourages and rewards risk-aversion by banks. And partly because, from suburban semi to Canary Wharf, people realise that the elastic is bound to twang back at some point. QE has very obviously introduced distortions that historically are almost always worked out in crises or crashes. In other words, QE undermines confidence: another avenue of feedback that the monetary economists failed to follow..

Quite simply, the post-2009 policy has been a live experiment and has failed. But “they” are all in it together so neither governments nor former governments nor central banks dare admit that it has failed.

What makes you think its ‘failed’? If the purpose was to help create inflation, and protect and enrich the 0.1% , then its has succeeded. Gone are the days we are ‘ruled’ by elected individuals, they are not generally clever enough to interfere or challenge the financial elite who are increasingly controlling our lives for substantially their own benefit. It was probably ever thus, except for a brief window in the mid-20th century when control was loosened to counteract the ‘threat of communism’. The latest over-contrived ‘threat of radical Islam’ allows full control to be re-introduced.

Dear JW
I prefer the cock-up theory to the conspiracy theory, as nicely illustrated in the exchange started by moominmama below. But I would agree that monetary economists, notably the US Reserve, seem to believe that “what’s good for Wall Street is good for the United States” and those particular 1%ers are always in favour of more liquidity.

The worst of these Central Banks too is that in between actually issuing QE they intervene in the ‘markets’ with leaks & rumour as and when they see fit. So are in there driving stocks ever higher when in fact they should be falling due to prevailing and future outlooks.
Bernanke is the prime example, and what he says affects stocks globally – what power. But it is all fake, everything has become rigged, buying into anything related to FTSE etc is now nothing more than a game of roulette.
I am out of that sort of ‘investment’ completely but I had wondered what could possibly have caused the FTSE to jump 50 point in the last few minutes of trading yesterday, when previousy it had been tumbling quite seriously over two days. Look no further than Bernanke – again!!
Anyone putting their hard earned money into this would be mad, as any day soon this unsustainable rumour driven ponzi is going to implode.http://market-ticker.org/akcs-www?post=210624

Hi Mike and welcome to my blog
There was another rumour in the market and that was that the ECB was going to set yield caps for peripheral nations bonds (aka Spain). This gathered a bit of traction in spite of the fact that it was recycled news and that it was Friday afternoon. Throughout my career Friday afternoons have been full of rumours and if we go back in time they were for ages that the UK was going to join the snake/EMU which was only stopped when we did!
But as you point out the rumour mill these days involves expectations of central bank action. Accordingly there are real issues with price setting in many markets. If we return to the subject in this article we see the Bank of England denying any effect from this unless it is a good one….

Another great blog. Good to see there is somebody, not prepared to let them get away with it.

Civil Servants have very few rules.

1. They will take full credit for any positive outcome, whether it is anything they have influenced or not.

2. All negative outcomes are best ignored and, but if questioned, they are nothing to do with them. Libor scandal with the BOE is a classic illustration of this rule.
3. If a decision needs to be made, either pass it to your boss to decide or give the safe answer no.
Many years a go when I worked for the MOD as a scientist, we had a saying: “You can lead a bureaucrat to knowledge, but you can’t make them think”!

The BOE document on QE to me is turning it into a new religion. Without any quantifiable facts, just believe our gospel. You know when an organisation have lost the plot and run out of ideas, when they believe their own PR bull.

To me QE has achieved the following:
1. Provided the banksters with cheap money to invest in areas where they are guaranteed a return.
2. Oil as this currently seems to be a one way bet. If increases slow down invent a shortage rumour. Last week it was Israel is more likely to attack Iran.

3. Invest in soft commodities, any adverse weather of droughts or exceptional rain, can only help boost prices and profits and bonuses. People have to eat.
4. Don’t invest the money in form of loans to industry, unless it is at a very significant premium rate as it is risk or alternatively if you can make vast profits by selling it in the form of a complex financial instrument to somebody who will understand this, like local the Fish and Chip shop.
5. Fix the bond market, so the Government can borrow money very cheaply and wreck the annuity market, scrap the retirement age, so potential pensioners will now be paying more tax, where they can’t afford to retire, they will work until they drop.
6. Higher inflation which is well above wage increases, so disposable incomes are shrinking. Blame the Eurozone, Jubilee holiday or anything else for lack of growth. It has nothing to do with falling real wages!
I expect to see another very significant round of QE after the challensor’s November budget statement where he tries to kick the balanced budget can into 2017-18 or later and he loses market credibility and pobably our AAA rating.

All ready for the 2013 perfect financial storm of US austerity, an escalating Eurozone crisis and at best no UK growth and if we are lucky stagflation, but probably our own crisis due to escalating inflation and a ballooning Government deficit.

But don’t worry if we all believe more in the new religion of QE and read and practice the BOE QE gospel everyday, everything will be fine. You know their right, for reassurance, just look at their GDP growth and inflation prediction records since 2008!!!

Shaun,
I have been unable to find the wording of your original proposal for an elected MPC so forgive me if you’ve answered this already. On what basis would voters choose a particular MPC candidate? Would it be based on their perception of that candidate’s ability or their willingness to fulfil the MPC’s primary objective of price stability (low inflation)? This is the scope of their remit as it currently stands so it must surely be the only criteria on which voters could judge them. If inflation remains above target, hawkish members would expect to get re-elected and doves to lose their seat on the committee.
If not judged against the remit, would voters choose a candidate based simply on what policy they personally would like to see pursued? I have seen a speech from a former rate setter indicating a desire to see transfers of wealth from rich to poor. Might voters therefore choose a candidate on ideological grounds, and if so, what then would be the point of an MPC supposedly independent of political influence?